Although electronic means for executing financial transactions have increased substantially, paper checks are still used to a considerable extent despite the potential for their fraudulent use. In a typical transaction, a bank customer uses paper checks to make payments. A check is prepared with the necessary information including payee, check amount and authorized signature. The check is forwarded to the payee that endorses and presents the check to the payee's bank for payment. If the issuing bank and payee bank are one and the same, the bank can quickly clear the check and transfer the appropriate amount of funds from the payor's account to the payee's account to the extent there are sufficient funds in the payor's account.
If the payee bank is not the same as the payor's bank, the check, commonly known as a transit check, is presented to the payee's bank for payment. The payee bank forwards the check to a clearing unit such as a federal reserve bank or a private clearing house. The clearing unit forwards the check to the issuing bank for validation and payment. The issuing bank's check processing center processes the check and reports back to the clearing unit. If the check is validated, and sufficient funds are present in the payor's account to cover the check, the clearing unit will retrieve funds from the payor's bank account and deposit the funds in the payee's account.
The traditional check clearing process has been accelerated with the use of scanning technology. Federal legislation passed in 2004, known as the Check Clearing for the 21st Century Act, permits a bank to scan the front and back of a check to create a substitute check that is forwarded electronically to a clearing unit. Although this accelerates the check clearing process, it still involves the need to verify the fundamental components of a check including valid signatures.
Due in part to considerable advancements in paper reproduction and copying technology, perpetrators of fraud can modify what are otherwise valid checks to re-direct funds to fraudulent accounts. Checks, signed with authorized signatures, including those constructed with sophisticated inks, patterns and encrypted data, if intercepted after being sent to a payee, can be photocopied and modified with respect to the payee, check amount and check number fields to create fraudulent, but facially acceptable checks. If intercepted before use by an unauthorized user, the check number field can be modified in an attempt to avoid detection. The modified checks are then presented for deposit in a temporary account. Once the funds are deposited in the account, the funds are wired to one or more offshore accounts, or cash can be withdrawn from the receiving account, before either the payor or payee becomes aware of the fraud. Because checks are typically printed with serialized check numbers, it is easy for a fraud perpetrator to modify a check with a false check number that will not raise suspicion when presented for deposit. The losses borne by banks and bank customers associated with processed fraudulent checks are considerable and run into the billions of dollars annually.
To counter check fraud, many devices and methods have been developed to identify fraudulent checks and reduce overall losses. U.S. Published Patent Application No. 2002/0067827 A1 ('827 application) represents one approach used. The '827 application discloses a check fraud prevention method that utilizes some of the unique information presented on a check. The payee information, check amount and even check number are combined through an algorithm to create a unique identification number. The generated identification number is encrypted and printed onto the check before delivery to the payee. When the payee presents the check for payment to the payee's bank, a proprietary apparatus configured to read the encrypted information is used to verify that the payee, check amount and/or check number are valid.
Although this system has its merits, it requires each bank to purchase the encryption machine to verify the validity of the check. It also requires any party issuing a check to purchase the encryption creation and printing apparatus. This invariably adds considerable expense to the check validation process. In addition to these shortcomings, the information needed to create the encryption is provided on the very check the encryption is intended to protect. As such, the fraud prevention technology is far from foolproof because the passcode is generated from information on the check. If the information is changed, a valid passcode potentially could be generated from the changed information and printed on the modified check.
In another method disclosed in U.S. Pat. No. 6,315,329, unique information printed on a check is encrypted to be read by a Magnetic Ink Character Recognition reader (MICR reader) that reads magnetic ink character recognition designations at the bottom of a check. This too requires the purchase and application of a standardized encryption system and encryption reader. For this system to work, each bank or clearing entity involved in a check transaction has to invest in the proprietary encryption readers. Each check issuer has to purchase the encryption creator. For effective use of this check fraud prevention system, industry-wide adoption is needed to be functional and effective. And like the '827 application, the '329 patent concerns check encryption of data printed on the check. Again, the information needed to potentially create a fraudulent check is presented on the check itself and can be recalculated to match the information on the fraudulent check.
What is needed and what I have developed is a check fraud prevention method that does not require the need for any sophisticated check preparation apparatus, or encryption creation and decoding apparatus, as my method does not require the creation of any encrypted information regarding the particulars of a check. The method does not require any special training with respect to bank employees and can be used industry-wide without the implementation of any sophisticated technology. The technology needed is technology already in place in the banking system. These and other objects of the disclosure will become apparent from a reading of the following summary and detailed description of the disclosure as well as a review of the appended drawings.